In 2010 a new Heat Act is scheduled to come into force in the Netherlands, with the aim of ensuring fair terms and prices for consumers of district heat. The Office of Energy Regulation, part of the Netherlands Competition Authority, will be responsible for overseeing compliance with the legislation. Among other activities, the Office will be establishing policy rules laying down the conditions to be adhered to in establishing a reasonable price for heat supply. To adequately effectuate compliance with these rules, the Office commissioned CE Delft to conduct two studies, one to inventory existing Dutch heat grids, suppliers, producers and tariffs, the other providing insight into the main cost drivers of heat supply.
Dutch heat grids: a market analysis
In the Netherlands district heat systems come in all shapes and sizes, from large scale grids with tens of thousands of connections to small grids serving only a handful of consumers. In collaboration with the energy companies involved and research organisations like SenterNovem, CE Delft has carried out a full survey of the country’s heat grids.
In this survey a distinction was made between large and small scale grids, with the dividing line set at 5,000 connections. The Netherlands has thirteen large scale grids serving approximately 227,000 consumers, the heat for which is supplied by big power generators (including Eneco, Essent and Nuon). In addition, these suppliers deliver heat to around 300 small scale grids. The other small scale grids, some 6,600 in all, are owned and operated by housing corporations, owner associations, project developers and other such parties. A total of 336,000 homes are connected to a small scale grid.
The heat tariffs charged by the major energy companies are based mainly on the NMDA tariff recommendations drawn up by EnergieNed, the country’s energy trade association. The tariffs charged by the other suppliers (housing corporations, owner associations, etc.) are often computed by heat cost allocation agencies, based on the actual costs of heat supply.
The main heat sources for the large scale grids are (gas-fired) cogeneration plant and conventional (gas- and coal-fired) power plant, with a small fraction deriving from renewables. Small scale grids are fed with heat from a wide range of sources, from cogeneration plant (both small and large) and conventional boilers to heat and cold storage systems and communal solar boilers.
Cost drivers of heat supply in the Netherlands
In this second CE Delft study two types of factor driving heat supplier costs were distinguished: those influencing costs that are independent of supply and those influencing supply-dependent costs. The former have no (direct) relation with the amount of heat supplied, while the latter rise (proportionally) with increasing supply.
The study shows that the main cost drivers in the first category are the size and age of the heat grid and historical acquisition costs (wage and material costs at the time of the initial investments). The supply-dependent costs (i.e. the price paid to generators) are governed by the type of heat source involved, cost-sharing arrangements between the heat distributor and producer, and the nature and scale of supply.
The profitability figures cited by heat suppliers vary considerably, depending on the grid concerned: from -11% to 23% for large scale grids and from -258% to 7% for small scale grids. Heat suppliers in a position to do so often opt for a portfolio strategy, using profitable heat grids to compensate for loss-making ones.